Fha Raising Down Payments

Move Could Edge Some People Out Of The Market

Starting July 1, home buyers seeking an FHA loan will have to come up with larger down payments under changes approved Friday by the Federal Housing Administration.

The new regulations might drive some people out of the housing market, a mortgage bankers group said.

They will allow consumers to finance only 57 percent of closing costs, such as the cost of title searches and fees for appraisers and lawyers. Previously, buyers could finance all closing costs, said McKim Beale, spokesman for the Peninsula Mortgage Bankers Association.

The FHA said the requirement was necessary to shore up a mortgage program incurring losses at a rate of $200 million per year.

The losses were blamed in part on the failure of the FHA to require a sufficiently large down payment. With less of their own cash at risk, homeowners are more likely to default on their mortgages, according to the FHA.

FHA financing is the second most popular form of mortgage on the Peninsula. Last year, 23 percent, or 1,102, of the 4,792 homes bought on the Peninsula were purchased with FHA financing, according to Virginia Commonwealth University's real estate research center.

On a $113,050 FHA loan, the maximum allowable for this area, home buyers will have to come up with $1,166 more in cash after July 1, Beale said.

FHA financing is favored by first-time home buyers because it does not require a large down payment, he said.

On a conventional mortgage, buyers might have to make a 20 percent cash down payment, while FHA requires less than 5 percent, he said.

These "cash-starved people" are going to be hard-pressed to come up with the extra cash, Beale said, warning, "It's going to push a lot of people out of the market."

The Mortgage Bankers Association in Washington estimated the new rules could reduce home sales by 100,000 to 200,000 each year, enough to abort a recovery in the housing industry.

The FHA said its own review estimated the more stringent standards would prevent only 20,000 potential buyers from purchasing homes.

In addition, buyers who finance the mortgage insurance premium will have to pay an extra half-percent in their monthly payment for up to 10 years, Beale said. The FHA writes its own mortgage insurance, which protects it from loss in case a borrower fails to pay off the loan.

The FHA charges 3.8 percent of the loan amount up front for a mortgage insurance premium.

The 3.8 percent of the loan amount can be financed and paid in the monthly mortgage payment, Beale said.

But, under the new regulation, buyers who finance the premium will have to pay the extra 0.5 percent each month for up to 10 years, depending on the size of the down payment, Beale said. A down payment of less than 5 percent draws the longest pay out time on the mortgage insurance, he said.